Flat Tax Here We Come

April 17, 2007

Yesterday, Ari Fleischer argued in the Wall Street Journal that the wealthy bear too much of the U.S. tax burden. Jon Chait gave the op-ed a good thumping here (among other things, the top 1 percent are paying more in taxes these days because they're making more money, not because they're getting soaked harder). But it's also worth noting a new study on this issue by Thomas Piketty and Emmanuel Saez, which finds that the U.S. tax system is becoming steadily less progressive, and could even become effectively flat in a matter of years--at least for the top half of earners.

Among other things, since 1960, the effective federal tax rate--lumping all taxes together--has fallen dramatically for the top 0.01 percent (from upwards of 71 percent to about 35 percent), risen a bit for those in the middle quintile (from 15.9 percent to 16.1 percent), and risen rather significantly for those in the 60th percentile to the 80th (from 16.7 percent to 20.5 percent). And it could get even flatter if Congress raises Social Security taxes for whatever reason or if the Alternative Minimum Tax doesn't get fixed and starts hitting lower earners.

It's an interesting study. But it also looks only at federal taxes. A few years ago, the Christian Science Monitor did an analysis of total tax burdens, including state and local taxes (which are regressive), and found that the United States was even closer to a flat tax than Piketty and Saez believe. The middle quintile of earners pays a total tax rate of about 27 percent, while top earners pay about 32.8 percent. Not exactly a yawning difference--and that gap might be narrower depending on how adept top earners are at finding tax shelters in the Cayman Islands. So even as Fleischer's grousing that the tax structure is too progressive, there's plenty of reason to worry that it's losing virtually all of its progressiveness.